Commissioner Of Income Tax Delhi v. M/S Nav Sansar Agro Products

$~17 *IN THE HIGH COURT OF DELHI AT NEW DELHI %Judgment delivered on: 16.11.2016 + ITA 128/2004 COMMISSIONER OF INCOME TAX DELHI..... AppellantThrough: Mr. P. Roychaudhry and Ms. VibhootiMalhotra, Advs. versus M/S NAV SANSAR AGRO PRODUCTS ..... Respondent Through: Ms. Kavita Jha and Ms. Mehak Gupta,Advs. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI S. RAVINDRA BHAT, J ( Oral) 1.The questions of law framed in this case are as under: “1. Whether learned ITAT is correct in holding that theassesseeisentitledtosetoffinterestfinanceandprofessional and other charges of Rs.75,35,047/- paid in theassessment years 1991-92 and 1992-93 respectively fromthe interest income of the assessee for the assessment year1993-94? 2. Whether the order of the learned ITAT dated 16.12.2002dismissing the appeal of the Revenue is perverse and as it isa non speaking and non reasoned order and does not dealwith the reasoning and facts mentioned by the AssessingOfficer?” 2.The assessee, which deals in real estate, entered into an agreement for purchase of 24,000 sq. yards of commercial land on27.08.1990 for consideration of ` 4.88 crores, in furtherance whereofit paid ` 2.20 crores as earnest money.Substantial amounts wereborrowed for this purpose from American Express Bank.ForAssessment Year (‘AY’) 1991-1992 it paid ` 25,61,661/-, and `49,73,775/- for AY 1992-1993, as interest, to the banker. In addition,for the first year i.e. 1991-1992 the assessee claimed certain expensesas legal and other incidental charges. In AY 1991-1992 and as wellas in the subsequent year 1992-1993, the assessee’s computation oftotal income contained a note, which reads as under: “.... The company acquired lands in villagesituated in Distt. Gurgaon and entered into agreementto sell with DLF Universal Ltd.Accordingly, thebusiness has already commenced and the revenueexpenses have been claimed in the Profit & Loss A/Cand in the return of income, except interest & finance/legal charges which have been excluded on the basis ofstand of the department in other group cases that thesame is includible in the cost of land (stock-in-trade). Itis, however, claimed that the above disallowance hasbeen made out of abundant caution and the same isallowable in this year, being a period cost which doesnot go to increase the cost of stock-in-trade, and as suchthe same may please be allowed....” 3.The subsequent year’s (1992-1993) computation of income toocontained an identical note. The effect of this was that the interestexpenditure was offered for self-disallowance as a matter of“abundant caution”, though it was allowable as period cost which didnot go to increase the cost of stock-in-trade. This was on account ofthe assessee’s adoption of the then prevailing standard applicable to project completion method for recognizing revenue and otherexpenditure. 4.For AY 1991-1992 and 1992-1993 the assessment was framedand the recognition i.e. self-disallowance was accepted.In theassessment year in question i.e. 1993-1994 the assessee reported thatthe transaction had fallen through and was rescinded. It consequentlyreturned the earnest money and also re-paid the bank. It also receivedback its earnest money together with interest of over ` 91 lakhs. Asagainst this, the assessee sought to set off the total interestexpenditure as “prior period” expenses. This was disallowed by theAO, held that since the expenditure was not incurred during therelevant assessment year in question the claim of prior periodexpenditure could not be allowed. project completion method for recognizing revenue and otherexpenditure. 4.For AY 1991-1992 and 1992-1993 the assessment was framedand the recognition i.e. self-disallowance was accepted.In theassessment year in question i.e. 1993-1994 the assessee reported thatthe transaction had fallen through and was rescinded. It consequentlyreturned the earnest money and also re-paid the bank. It also receivedback its earnest money together with interest of over ` 91 lakhs. Asagainst this, the assessee sought to set off the total interestexpenditure as “prior period” expenses. This was disallowed by theAO, held that since the expenditure was not incurred during therelevant assessment year in question the claim of prior periodexpenditure could not be allowed. 5.The Commissioner of Income Tax (Appeals) [CIT(A)] reversedthe AO’s reasoning. The CIT(A) noted that identical transactions ofseveral group companies had been scrutinized in various assessments.It relied upon the decision of the Income Tax Appellate Tribunal(‘ITAT’) in Vee Dee Investment & Agencies Ltd. vs ACIT ITA No.7663/Del/91.The CIT(A) also relied upon his own decision dated13.12.1994 in appeal nos. 34/94-95 and 42/94-95 in the case of KumKum Cultivation Pvt. Ltd. The gist of the CIT(A) reasoning was thathaving regard to the assessee’s method of accounting, whichrecognized expenditure by increasing the cost of land at the time ofconveyance, since the AO accepted the method for past years,disallowance, he ought to have permitted prior period expenditure.The CIT(A)’s reasoning was affirmed by the ITAT. 6.It is urged on behalf of the Revenue that ITAT and the CIT(A)fell into error in holding that prior period expenditure could bepermitted in the manner as was done in this case. It is urged that theassessee had not claimed any deduction for the previous year i.e. AY1991-1992 and 1992-1993 in respect of interest and other charges andno such expenditure of the kind sought actually arose even in thecurrent assessment year. As a consequence, the amount could not betreated as prior period expenditure. It was also urged that the interestliability of the assessee towards the bank was a determined andcrystallized one and, therefore, could not be said to be a permissibleprior period expenditure. 7.This Court has considered the submissions. The note appendedto the computation of income file along with the return by theassessee in this case clearly stated that interest and legal charges wereexcluded on the basis of the Income Tax Department’s stand in othergroup cases that they could be included in the case of land and weredone by way of “abundant caution” as a disallowance. 8.Having regard to this circumstance and further the fact thatother group company cases i.e. Kum Kum Cultivation involved asimilar and identical exercise where ultimately the disallowance wasset aside by the ITAT, the adoption of the same course of action inthis case cannot be said to have been erroneous. Furthermore, in theeventuality of the transaction itself maturing the likelihood of theassessee being permitted to capitalize or include the interestcomponent as part of the cost of land has not been disputed. If such iscorrect course of action, the reverse situation whereby the transaction does not mature, should also attract a similar treatment that theinterest paid but not shown as deductible expenditure for the previousperiod should be permitted as prior period expenditure. 9.The questions of law are therefore answered against theRevenue and in favour of the assessee.The appeal is, therefore,dismissed. S. RAVINDRA BHAT, J NOVEMBER 16, 2016/kk NAJMI WAZIRI, J